Tax Foundation Testifies before Vermont Legislature on Future of Vermont’s Lottery

January 17, 2008

Vermont is one of a dozen states that are considering leasing or selling their lotteries. Yesterday, Alicia Hansen, author of the Tax Foundation Background Paper Gambling with Tax Policy: States’ Growing Reliance on Lottery Tax Revenue, testified before the Vermont Legislature’s Ways and Means Committee on the merits and drawbacks of different types of lottery privatization.

She explained that selling the lottery to a private company would be preferable to leasing it because a sale would remove the state entirely from the lottery business:

The drawback to a lease, from a tax policy standpoint, is that the state would still be involved in the lottery business and would still in effect be imposing a high implicit tax on lottery sales when it collects the annual revenue from the private company. …

The third option is selling the lottery outright to a private company. This is the best option, and has been considered by Massachusetts, Colorado, Texas, Michigan, Illinois and New Jersey (some of these states have also considered leases).

There are a few potential challenges to consider, however. Lawmakers looking to sell a lottery—or any public asset—for a one-time payment must consider what will happen after the lump-sum payment is used up. Will the money be spent slowly and carefully, and will it last as long as predicted? The executive director of the California Budget Project, commenting on Governor Schwarzenegger’s lottery-privatization proposal, said, “The problem is that it’s a one-time infusion of cash when we have an ongoing budget shortfall. … You can only sell an asset once.”

However, in FY 2006 Vermont raised only .6% of its own-source revenue from the lottery, less than the average lottery state. If Vermont is going to sell the lottery, now would be the best time, before it becomes more dependent on lottery revenue. Losing the revenue now would likely not be as painful as many people fear given the small fraction of the budget it comprises.

. . .

Some lawmakers … have expressed concerns that are not as dire as them seem. Some worry that a private company will more aggressively market its products to the poor or offer certain new types of games, such as internet ticket sales, that would induce people to spend beyond their means. However, the legislature, if it wishes to do so, can consider banning certain types of gambling within the state, such as internet lottery ticket sales or video lottery terminals. (However, there is the possibility that such a ban would decrease the amount a private company would be willing to pay for the lottery.)

In addition, it seems likely that a private lottery company would have more sophisticated technology at its disposal and would create more complex games with increased entrainment value. These games could be marketed to upper- and middle-income consumers, just as casinos often cater to an upper-income clientele. Lower-income lottery players tend to prefer numbers games and instant games, which require less effort to produce. It would make sense for a private company to target a customer base with more disposable income rather than attempt to induce lower-income individuals to purchase more lottery tickets. Of course, lower-income lottery players will most likely continue to play the lottery whether it is run by the state or by a private company. Some legislators may worry that a private company would be able to draw in more poor lottery players as well as more upper-income players. However, it is not the job of the state to prevent people from spending beyond their means on private goods and services; it is only the responsibility of the state to refrain from taxing the poor disproportionately.

The advantages of a lottery sale are significant: money from the sale could go a long way if handled wisely; the state would get out of a business that is not appropriate for government; and Vermont’s tax system would be more principled. In addition, if the legislature removed the monopoly status when it sold the lottery so that multiple companies could operate lotteries in the future … competition in the lottery market would likely lead to greeter accountability and lower prices as companies compete for consumers’ business.

Read the testimony here.

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